US Regional bank stocks - PNC Financial, TFS - Truist, USB- USB Bank, MTB - M&T Bank etc

[Gregmal]

5 minutes ago, Spekulatius said:

I briefly went through this presentation and can point to a handful misrepresentations.  For once, USB management stated that they are not buying back stock for the time being and rebuild the capital buffer above 9%. USB does very well in stress test results and has smallish CRE exposure. Now, if you criticize the stress test itself, you need to do this with for banks.

 

Anyways, bought a few more shares today.

I dunno Spek. Did you see their "Who we are" slide? You and I have made mistakes in our investing lifetimes, but these guys? Busting out all the right moves at just the right times. Track record of many, many successes and zero failures, plotted elegantly over many, many years. They must be very rich. You sure you wanna take the other side of the trade?

[TwoCitiesCapital]

2 hours ago, CorpRaider said:

Just a thought I had last night:  Wouldn't the most people get caught offsides (now that we have all plowed into government debt mmmfs and t-bills) if something happens with the debt ceiling and more direct exposure to treasury obligations is discounted as riskier than having an intermediary private bank and the FDIC layered on top of that treasury backstop (i.e., all these direct exposures take a larger, material quotational loss; or USA debt gets downgraded again and settles lower than Wells or JPM)?

 

Hard to say what would happen again, but in 2011 when US debt was downgraded the first time, it was treasuries that rallied and stocks that sold off. 

 

Can't say it'd play out the same again, but if that's your scenario we DO have a historical precedent of bonds doing well.

 

Secondly, I don't know many people here suggesting long-duration bonds as an alternative to cash deposits.

 

They're talking about money markets, short term corporate paper, or 1-2 year type bonds. None of these would have a material mark down even if rates went significantly and credit spreads blew out because the rate and spread duration are very limited on 1-2 year type paper - especially after being down 5-7% last year which dramatically reduced the duration risk already.

 

Is it more than the move in a deposit account? For sure. Is it enough for people to forego multiple points of interest over the next 12-24 months? Doubtful. 

[CorpRaider]

I'm probably just going to make sure I've got a little more personal liquid cash in FDIC covered accounts. 

Edited April 19, 2023 by CorpRaider

[mcliu]

5 hours ago, Gregmal said:

Man, every Tom, Dick and Harry now knows how to play the game. Just proclaim that the Fed won't have any credibility unless they do what we want them to. Dont mind our positioning LOL

 

"Until the Fed corrects its errors with respect to the country’s fifth largest bank, it cannot be credible as a banking regulator"

Too hard pile for me.

It's not really a short thesis (despite the dramatic title) but more of a pair trade.

I think it's fair to question why USB should be valued higher than WFC when it's far more capital constrained.

Edited April 19, 2023 by mcliu

[Spekulatius]

35 minutes ago, mcliu said:

Too hard pile for me.

It's not really a short thesis (despite the dramatic title) but more of a pair trade.

I think it's fair to question why USB should be valued higher than WFC when it's far more capital constrained.

WFC is only cheaper than USB based on HoldCo cherry picked metrics P/ tangible book, which isn't even regulatory capital. Based on earnings power, USB is quite a bit cheaper. WFC is also still operating under the asset cap which has restrained it's growth, so i think on growth USB will beat WFC as well.

 

I think @Dalal.Holdings is correct that these guys are hyena's that have dealt with bank carcasses before, but I have little doubt that USB needs to be valued as a going concern here and tangible book only matters as far as regulatory capital levels are concerned.

 

If we are going to tangible book including AOCI, then BAC is undercapitalized too with only ~$80B in tangible capital for a $2T balance sheet banks. Then you can write the entire thesis with BAC instead of USB which i think wouldn't make much more sense either, imo.

[changegonnacome]

New Bank Added to Insured Bank Deposit Program

Dear Client, We would like to provide a brief update on our Insured Bank Deposit Program. What: Simmons Bank, Tristate Capital Bank will be added to the Insured Bank Deposit Sweep Program.       Maybe past is prologue distinctly remember First Republic getting added to IBKR's sweep program in the weeks before their troubles!

[Dalal.Holdings]

2 hours ago, Spekulatius said:

If we are going to tangible book including AOCI, then BAC is undercapitalized too with only ~$80B in tangible capital for a $2T balance sheet banks. Then you can write the entire thesis with BAC instead of USB which i think wouldn't make much more sense either, imo.

 

Yeah if you are buying a holdco carcass to pull a fast one on the FDIC then the remaining net tangible assets might matter, I’m not sure it matters in this case as much (and yes BAC doesn’t look great on that standpt). They also seem fine on liquidity standpoint and stated their AFS duration is down to 3.8 years now. Mgmt also stated they got swaps/etc during the qtr to mitigate long end interest rate rise.

 

What’s amazing is that folks are drumming up worry about capital ratios today when back in the day it was quite common for big institutions to be levered 30 to 1, even 40 to 1 for long periods holding god knows what kind of “risk weighted” assets. Relative to those days, banks are flush with capital holding safe & liquid securities, so I’m not getting this fixation on CET1 which is a highly scrutinized metric. If there is a bank implosion, I don’t think it will be due to CET1 ratio problems…

 

If you have sticky deposits (unlike SVB) and don’t have massive credit risk (which is what the stress tests are designed to detect), where is the point of failure going to be ?

[CorpRaider]

I think there's a fair bit of hyperbole there but have considered lightening up on BAC and USB over recent weeks.  There would be zero shock if forced to build/trap more capital for a while.

 

Liked the slides on the deposit bases.  Both are nice, that's the only reason I own a bank.  I like how they said these deposit bases are uncannily similar and there's this yuge gaping hole in source all on the east coast down into TX for USB.  Wells also got the low low "beta."  But USB has Elavon.

 

Hey $TD is getting big short interest.  Sell that thing down cheap and I'm game.  Canadian banks versus tobacco cos for greatest industry of all time?

Edited April 20, 2023 by CorpRaider

[mcliu]

4 hours ago, Spekulatius said:

If we are going to tangible book including AOCI, then BAC is undercapitalized too with only ~$80B in tangible capital for a $2T balance sheet banks. Then you can write the entire thesis with BAC instead of USB which i think wouldn't make much more sense either, imo.

I think BAC's CET1 of $185B already includes AOCI losses from AFS but not unrealized HTM losses ($85B including).

If you include AOCI USB is at $43B and maybe ~$35B with unrealized HTM losses.

[tnp20]

Buffett's been selling a lot of long term hold banks over last couple of years including USB and PNC. WFC he sold because of their regulatory issue and his beef with Scarf not relocating but USB and PNC have been long term holds and he hates to sell and pay taxes so what is he seeing ????? I am with McLiu ...this may be too hard a pile.

 

He added C which is interesting and C has a fat CET1.

 

https://www.yahoo.com/finance/news/warren-buffett-dumped-several-banks-174500859.html

[Valuebo]

7 hours ago, Dalal.Holdings said:

 

What’s amazing is that folks are drumming up worry about capital ratios today when back in the day it was quite common for big institutions to be levered 30 to 1, even 40 to 1 for long periods holding god knows what kind of “risk weighted” assets. Relative to those days, banks are flush with capital holding safe & liquid securities, so I’m not getting this fixation on CET1 which is a highly scrutinized metric. If there is a bank implosion, I don’t think it will be due to CET1 ratio problems…

 

 

 

Correct. I'd say it's completely unlikely. But everyone fighting the last war. Banks aren't even the same animal anymore. 

 

Sure, I guess if inflation went far crazier or years and they hiked rates way higher, they would maybe get in trouble. But way more things would break far sooner. I've also not been in that extreme inflation camp, quite the opposite. 

[Spekulatius]

9 hours ago, mcliu said:

I think BAC's CET1 of $185B already includes AOCI losses from AFS but not unrealized HTM losses ($85B including).

If you include AOCI USB is at $43B and maybe ~$35B with unrealized HTM losses.

Yes, that’s about correct.

[Spekulatius]

If you want to look at bank that that took some damage from the recent banking crisis, look at $KEY's report:

https://finance.yahoo.com/news/keycorp-reports-first-quarter-2023-103000897.html

 

Their cost of deposits doubled from ~0.5% to almost 1% from Q42022 to Q12023 and that compressed NIM. They also have a relatively large fixed income portfolio.

Edited April 20, 2023 by Spekulatius

[tnp20]

https://archive.ph/HBvtL

 

WSJ:

 

Fed Rethinks Loophole That Masked Losses on SVB’s Securities

Potential change would reverse 2019 decision to loosen rules for midsize banks

All told, regulators are considering extending toughened restrictions to about 30 companies with between $100 billion and $700 billion in assets, the people said. A proposal could come as soon as this summer, and any changes would be phased in, potentially over a couple of years.

Regional banks such as U.S. Bancorp, PNC Financial Services Group Inc., Truist Financial Corp. and Capital One Financial Corp. could be affected, and could be made to bolster capital. That could prompt steps such as trimming buybacks, retaining more earnings or raising new capital from investors. Banks are planning to fight rule changes.

[tnp20]

I think this is why Buffett sold USB and PNC super regionals and added to BAC and C. These guys used their lobbying power under Trump administration to get the rule changed in their favor and Buffet didnt like that and USB compounded it with an acquisition that further eroded their capital buffers. Munger still owns USB and will likely ride this out but Buffett is very stringent about management quality, especially as it relates to banks due to their inherent leverage effect. There is a temptation to push the envelope to juice the earnings and Buffett is watching for this. All speculation on my part but I have been trying to figure out why he sold USB and PNC.....I only have theories....

[Spekulatius]

Any change in regulation will be phased on over many years, so imminent capital raises due to a change in regulatory treatment is unlikely.

 

The second issue is that it's not clear to me at all why the regulator would distinguish between HTM and AFS securities at all - it's all the same stuff. The only difference really is that BAC moved their AFS to HTM once they started to get into a loss situation and they did that to avoid a hit to regulatory capital.

 

They did that because the >$700B banks and the smaller ones are treated differently with respect to  AFS AOCI losses in terms of regulatory capital - the large banks they take it a hit and smaller banks they don't.

 

But how does it make banking safer if any bank going forward puts securities into HTM to begin with or they move them there once they start to lose value?

 

If they want to make banking safer they need to treat both HTM and AFS the same way, imo.

[TwoCitiesCapital]

47 minutes ago, Spekulatius said:

Any change in regulation will be phased on over many years, so imminent capital raises due to a change in regulatory treatment is unlikely.

 

The second issue is that it's not clear to me at all why the regulator would distinguish between HTM and AFS securities at all - it's all the same stuff. The only difference really is that BAC moved their AFS to HTM once they started to get into a loss situation and they did that to avoid a hit to regulatory capital.

 

They did that because the >$700B banks and the smaller ones are treated differently with respect to  AFS AOCI losses in terms of regulatory capital - the large banks they take it a hit and smaller banks they don't.

 

But how does it make banking safer if any bank going forward puts securities into HTM to begin with or they move them there once they start to lose value?

 

If they want to make banking safer they need to treat both HTM and AFS the same way, imo.

 

Didn't they USE to do that and this is a vestige of regulatory changes post GFC when MTM on bonds was done away with given that agency mortgages were in the toilet at that time? 

 

I could be wrong, but I was under the impression this is exactly how it was prior to 2008. 

[Dalal.Holdings]

Quote

Even without any rule change, U.S. Bank has said it expects to be subject to more stringent rules soon. The Minneapolis-based firm is growing and is likely to cross an existing threshold for lenders with more than $700 billion in assets. Executives on Wednesday said on an earnings call with analysts that change would happen “no earlier than the end of 2024.” 

 

Chief executive Andy Cecere said he didn’t think the bank would have to raise capital to boost its ratios but could instead rely on higher earnings and other measures. He called increasing the capital ratios “priority one.” 

 

The rules will be "phased in" over a couple of years. USB was already planning on needing to meet more stringent requirements by end of '24 because it projects it will become a category II bank around that time.  

[bennycx]

 

[mcliu]

[Sweet]

^ They’re done it seems.

[TwoCitiesCapital]

They're NIM went down 20% YoY with just 2 weeks of exceptional liquidity borrowings at a negative NIM.

 

Those borrowings are still required until they can offload assets to repay those loans. How do you envision thats going to impact Q2 earnings with a full quarter of negative NIM under their belt. 

 

I have to imagine the Fed will try to organize a sale. They went into this at 110% loan-to-deposits and then subsequently lost ~60% of those deposits (before considering $30 billion bail out) AND have continued to lose deposits to the tune of $1-2 billion in April. 

 

They've got A LOT of assets to unload and will hemorrhage earnings until then. Or they could be bought by a major with better liquidity/deposits. 

Edited April 25, 2023 by TwoCitiesCapital

[Spekulatius]

Yep, they are upside down, negative NIM. Borrowing at 5% and lending out at a fixed 3% or thereabouts. It’s just a matter of time until they fold.

[changegonnacome]

16 hours ago, Spekulatius said:

Yep, they are upside down, negative NIM. Borrowing at 5% and lending out at a fixed 3% or thereabouts. It’s just a matter of time until they fold.

 

Final destination is the grave......unless some dramatic rate cuts come.........this is that rarest of a birds a US bank that really wishes the US economy would go off a cliff ASAP to save its bacon! Quite a turnout for the bank investing handbook.

 

Doesn't necessarily think they are going out of biz immediately though........NIM's are negative but some equity capital can be extracted by selling the wealth unit......that will buy them a few more quarters before they breach regulatory ratios and need to raise external dilutive capital (if they can, not sure there's biz model there anymore when they sell wealth unit)...........of course all contingent on the large bank depositors sticking around.....in some respects whatever equity thats left in FRC (ignoring big picture MTM negative equity) is slowly getting transferred out the door to JPM et al in deposit interest payments.

[TwoCitiesCapital]

The only thing a rate cutting would do for them is cut the negative NIM by dropping the cost of their liquidity. 

 

But, since they're holding mostly loans and not treasuries, they may not get any extra oomph out of rate cuts helping loan values if its offset by widening credit spreads which I expect it would be so they'd still need the liquidity and still be paying for it all of the way down until the rates were below their NIM. 

 

Ultimately, I'm not there's a good outcome here unless if they're purchased by someone with low-cost liquidity who can pay off the liquidity loans and collect the NII. Losing half your deposit base is a tough pill for a bank. 

Edited April 26, 2023 by TwoCitiesCapital